Home > Uncategorized > European inflation is NOT soaring

European inflation is NOT soaring

inflation

Predictably (as energy prices can’t fall forever) consumer price inflation in the EU recently increased. The present level is 1,1% which is, in a historical perspective, outright low. Also, ‘core’ inflation (which, unlike consumer price inflation, has never been negative) remained subdued and even below 1%. Predictably, however, people already start to scream that inflation is soaring and we should be afraid about worthless money.

They are wrong. Four reasons:

  1. Inflation does not measure the purchasing power of money. It measures the purchasing power of nominal income. A nice example of this: the introduction of the euro. Despite the introduction of an entirely new kind of money and a whole new set of prices, the purchasing power of the income of households stayed more or less the same. As such, consumer price inflation shows what a household could have bought when nominal income had stayed the same and purchasing patterns had stayed the same. This is an extremely useful metric. But real households are of course smart. It’s not only the price level which changes, but relative prices change, too. When nominal income stays the same and prices increase (or even when nominal income increases) they will change their pattern of consumption. Economists should pay much more attention to such shifts, though they should of course take note that some of the most important prices of our economy (the mortgage interest rate!) are not included in the consumer price index. These changes in relative prices and spending patterns indicate that the idea of ‘the purchasing power of money’ is bonkers. The introduction of new products underscores this. What households do, want to do and can do with money changes all the time. This even leaves out ‘consumer credit’. Whenever it becomes easier or more difficult to obtain consumer credit, this changes the purchasing power of households.
  2. We should not be afraid about the debasement of money but about the debasement of nominal income: wages. And ‘mixed income’ of the self-employed. Nominal income should increase as much – and preferably a little more – than consumer price inflation. In 2016 this happened (at least when it comes to wages) but this was largely due to lower energy prices. At this moment, wage increases in many European countries are low, which, as energy prices are on the rise again, means that we run the risk of a deflationary downdraft (interestingly, wage increases in many transition countries are considerable which, as long as they keep asset price bubbles in check, is a good thing).
  3. It’s not just about consumer prices. A large chunk of household consumption is provided by the government: education, justice, coastal defences and the like. This is not measured by the consumer price index. After 2008, prices rises of these services were (as long as they were not ‘kind-of-privatized’) very mitigated, to a large extent because increases (if any) of government wages were lower than average. The price increases of government products and services used by households have often been even lower than the increases of consumer prices.
  4. Low increases of wages of course also means that ‘cost push inflation’ will be subdued. At this moment we do seem to have some kind of wage-price spiral in some countries – but one which goes down.

  1. January 8, 2017 at 11:49 am

    “Nominal income should increase as much – and preferably a little more – than consumer price inflation.”

    Should? In what sense economy “should” behave in a particular way? Sure, if the real GDP were about zero then the nominal income technically ’should’ change at the same rate as price inflation, and if GDP were running at X percent then the nominal income technically ’should’ be X percent greater than consumer price inflation, neglecting the Government off-the-CPI ‘income’. But there is no ’should’ that can be demanded of GDP, it kind of is what it can be under the circumstances of the day, at least within the current political and economic structure.

    Regarding “the idea of ‘the purchasing power of money’ is bonkers”. When we talk about the purchasing power of money we generally mean the purchasing power of the unit of money, not how much we can afford because of how much we happen to earn this year (let’s call it affordability). Surely if income increases at the same rate as the consumer prices then affordability is about the same, but the purchasing power (of one dollar) may have changed. This is not significantly affected by substitution, although I agree that substitution of some new/cheaper kind of goods for old/expensive kinds of goods is economically very important for affordability but only ’within those specific product sectors where substitution takes place’; not for the ’aggregate’ purchasing power OR affordability. The reason that general affordability is unaffected by substitution is because any money saved on one kind of product is available to be spent on other kinds of products, which in turn drives prices up of something else. The aggregate effect on affordability is zero if income and price inflation move together and GDP stays around zero. If under these conditions the real GDP goes up that means that there is some extra unaccounted for income, perhaps on the Governement side as you point out, and that can throw the accounting out significantly, depending on how and when that income is injected back into the real economy.

  2. January 8, 2017 at 7:19 pm

    merijntknibbe:

    What households do, want to do and can do with money changes all the time.

    That is an excellent point.

    Let me expand on it.

    One way of figuring out what households do, want to do and can do is to ask yourself, merijntknibbe, about the different instrumental values :: not exchange values :: goods [broadly defined] have as means of realizing particular ends.

    An instrumental value is the contribution that a good makes in an employed use, so employed in order to realize a particular end (or set of ends associated with this employed use). The contributions that goods make as means of realizing these ends is what instrumental value is all about.

    What households want to do, and can do is not independent of their needs to do. Which is to say that unless some particular ends are realized, others will not or cannot be.

    The instrumental value of money is as a means of realizing ends. Thus, not having enough money to make ends meet is more or less serious depending upon which needs (and wants) are going unmet. Obviously, what a household or people more generally can do with their money is clearly limited by how much money they have.

    Which is, of course, why the distribution of nominal incomes matters a good deal. It is also why relative price ratios in real termsis itself absurd. If the real realtive price ratio between two goods is, say, px/py = .5, it very much matters to consumers whether or not, say, px = $1.00 and py = $2.00 relative to their nominal income compared with px = $10.00 and py = $20.00 :: for making ends meet — which ends and how to meet them — requires very different budgets out of a given income. Nominal prices very much affect the patterns of consumption and also the composition of rivalrous goods within those patterns.

    Instrumental value :: value-in-use :: is the value that an object of use has as a means for obtaining a particular end [or set of ends] associated with a particular use or uses. An economic good exists if and only if 1. It can be used as a means that contributes towards the achievement of distinct ends; and 2. It is tradeable.

    *[Added Note: Stigler says:

    Ricardo says that, if a person receives two sacks of corn where formerly he recieved one, “he gets, indeed double the quantity of riches–double the quanity of utility–double the quantity of what Adam Smith calls value in use. Hence he did not believe that marginal utility diminishes as quantity increases.

    To which I ask ‘why’ one should assume that the particular contribution of unit of a good as a means for achieving a particular end ever diminishes? If one unit of a particular meat provides, say, 10 units of protein, then 8 units of that meat should provide 80 units of protein. The contribution additional units of a good as a means of realizing a particular end does not diminish as more of this good are used.

    Which is also to say that, though value-in-exchange is partially a function of scarcity (real or imposed), instrumental value depends upon the characteristics of these goods and is not a function of scarcity itself.]

    Michael Kowalik:“Should?

    This is not a normative judgment as such. If all prices equally went up and the distribution of nominal incomes remained the same, then both the patterns of consumption (including savings as future consumption) and the composition within those patterns would change. Even in mainstream theory, the total utilities of households, individually and in aggregate, would fall unless incomes rose equally with prices.

    Next: The Hicksian construct of the purchasing power of money is in real terms that effectively ignore any changes in budget formation out of income. That construction is invalid all of the time. The purchasing power of money may not be abstracted from the purchasing power of different incomes to deliver any kinds meaningful statements within a closed economy. Obviously, for international comparisons, one can abstract a unit of currency’s purchasing power relative to a different unit currency (and relative to a fixed basket of goods).

    • January 8, 2017 at 9:35 pm

      In one place you talk about ’instrumental value of goods’; in another about ’instrumental value of money’. This confuses me, because the first one, if it at all can be quantified, sounds a lot like ’price’ (a measure of value), and the other sounds a lot like ’purchasing power’.

      The concept of ’ends’ (as opposed to ’exchange value’) strikes me as essentially philosophical rather than economic, if it is about subjective preferences rather than about ’demand’ as a way to abstractly objectify/universalise subjective preferences.

      “The purchasing power of money may not be abstracted from the purchasing power of different incomes to deliver any kinds meaningful statements within a closed economy.”

      That’s sounds to me like saying that the aggregate price inflation (or aggregate Household consumption) cannot be meaningfully abstracted from individual prices (or household expenditures for particular ends), or at least that Macro tells us nothing meaningful about the real economy.

      Or are you simply rejecting the economic usefulness of all macro parameters?

      • January 9, 2017 at 5:59 pm

        I have a medical appointment this afternoon, so I will answer only part of what you ask me about. I will reply to your other questions later.

        Now, my end goals in purchasing foods to eat is to obtain objective, dietary protein levels, other objective dietary nutrient levels, and a positive degree of satisfaction with how I am doing so, if, in fact, I managing to do so, or in manners that please me somewhat [ or which don’t at all!]. The instrumental value of a foodstuff as a means of obtaining protein is independent of my preferences for or against it. And, since it is hardly just me able to influenced exchange-values, those values are mostly independent of my tastes and preferences just as as is the instrumental value of a good. Nor can we assume that exchange-values and instrumental values are correlated (a necessary assumption for all subjective utilitaritian or preference/indifference analysis.)

        So, if for instance my daily requirement for proteins in my diet is about 80 units but, over the course of a year, I manage average a daily consumption of, say, 20 units by eating foods I do not prefer or even like, then although I can and do objectively benefit from this level of consumption –not adequate to sustain health or life– it is simply an absurdity to assume that I must be subjectively ‘satisfied’ because, by assumption, I would never buy any amount of anything I would prefer not to.

        If, rationally, I must provide particular kinds of benefits for myself, then, rationally, I may very well have to buy foodstuffs that I least ‘prefer’ or even which I actively dislike just so as to obtain the benefits — here proteins — I need to have. {As an aside, George H. W. Bush benefited nutritionally from eating broccoli, though he hated and still hates the stuff irrespective of its instrumental nutritional values.} Those able to always have the highest level of subjective satisfaction from their consumption are those who can afford to purchase only what they most prefer to have when realizing the objective benefits they, for some reason, must have.

        Clearly, there are both objective and subjective consequences when unable to manage to eat nutritiously with appropriate levels of nutrients. There are also subjective consequences associated with eating or not eating what one prefers to have or not to have to .

        Similarly, the end goals of a firm when acquiring an input to production of, say, widgets are to acquire the amounts of the input sufficient in its contribution to attain a level of production to realize a particular level of profit. The firm must acquire sufficient amount of the input to realize a given amount of output associated with a given amount (or rate) of profit upon sales after deducting costs of production and other costs associated with distribution.

        Now, realized profits are to a ‘firm’ what realized satisfaction is to a person as a consumer. The former is objectively realized or not; the latter, subjectively realized or not. The construction of the theory of the ‘consumer’ in economics ignores that firms are themselves ‘consumers of goods’; and, this construction of the current theory of the ‘consumer’ solely as persons/households ignores the reality that ‘firms’ not only consume goods but compete with persons as other consumers for many goods and services.

        Every agent in economics is a ‘producer-who-consumes’ with instrumental and other ends in mind.

        People substitute between goods in order to obtain the instrumental values these goods have. Firms do also insofar as a production process has that flexibility. A firm usually sacrifices some profits if it must do so, for it has profits in mind when ‘prefering’ one input over another. So, if you can agree that input substitutions are, for firms, generally more costly (for various of reasons we need not get into), you should also be able to agree that goods-substitution for consumers can reduce satisfaction or remove it entirely.

    • January 10, 2017 at 9:12 pm

      That still does not explain the difference between ’instrumental value of goods’ and ’instrumental value of money’.

      On another point, I didn’t think any agent, rational or not, thinks ‘I need 20g of protein and 80g or carbs’ before they think ‘I’m hungry’ or ‘I want to eat that’. Besides, we all (or most, in the developed world), eat much more than what we need to survive, which makes this need irrelevant in our decision making about what to buy.

      Regarding businesses being consumers. Households are always ‘final’ consumers of goods while businesses generally are not. What that means is that when restaurants will but vegetables at the market just like households and thus seeming drive the price of vegetables up, they also sell prepared meals using those vegetables which will be consumed by some households in lieu of buying vegetables at the market, so the price effect on vegetables cancels out. That is why they are not counted as final consumers.

      Regarding ‘choosing what we do not prefer’. That’s logically impossible. Both sides of the debated about ‘reasons for action’ agree that intentional action is always about realising preferences. So when GW Bush hates broccoli but still eats it he demonstrates that he still prefers eating broccoli (for health reasons) than not eating it (for taste reasons). This topic is my main area of research now, but it is quite an extensive area.

      you may like to look at the following key contributions:
      Anscombe, G.E.M. Intention. Cambridge: Harvard University Press, 1957.
      Raz, Joseph. Engaging Rerason: On the Theory of Value and Action. Oxford: Oxford University Press, 1999.
      Schueler, G. F. Reasons and Purposes: Human Rationality and the Teleological Explanation of Action. Oxford: Oxford University Press, 2003.
      Stocker, Michael. “Desiring the Bad: An Essay in Moral Psychology.” The Journal of Philosophy, 1979: 738-53.
      Setiya, Kieran. “Explaining Action.” The Philosophical Review, 2003: 339-393. —. Reasons without Rationalism. Princeton and Oxford: Princeton University Press, 2007.

      • January 11, 2017 at 5:15 pm

        This reply is to you but also for merijntknibbe whom I believe will largely agree with what I am saying here.

        Kowalik: January 10th, 2017

        Because you are a philosopher and I an economist, we speak very different languages so to speak. That said, I am going to recommend Marjorie Grene’s Approaches to a Philosophical Biology in lieu of what you are suggesting I read. What’s most important to me about this book is that, if it is true that life forms are bodies, have bodies, and act out of those bodies — which, er, certainly seems to be ‘true’ — then all of economic theory, and especially the theory of the consumer, has no foundations. This is because no economic agent is a life form in economics.

        You have suggested I read about intentions in modern philosophy. Being passed my three score and ten, and recognizing that not all human behavior (or any life form) is ‘intended’ in the philosophical of reasoned, I am going to pass on your suggestion. With infants it has been shown that if, over a month, they are presented with an array of various foodstuffs with essential nurtients, then though not intentionally choosing a balanced diet on any days, they will nevertheless eat what provides them with essential nutrients.

        Now let me turn to what you say:

        You: I didn’t think any agent, rational or not, thinks ‘I need 20g of protein and 80g or carbs’ before they think ‘I’m hungry’ or ‘I want to eat that’. Besides, we all (or most, in the developed world), eat much more than what we need to survive, which makes this need irrelevant in our decision making about what to buy.

        When I say that we need 80 grams of protein daily, I do not intend to say that we know what our bodies know. Nor do I intend to say that we ‘calculate’ either before or after sitting down for a meal. We don’t. We are not rational calculators but life forms have critical needs and wants which have to be realized for our bio-psycho-social health and continuity. To the extent that we can reason prudentially, they are NOT irrelevant to our decision-making about what to buy.

        For the Greeks, rationality was essentially prudential providing for oneself, family, estate, et cetera. The Grasshopper, continuously choosing in favor of its preferences in the moment is, for the Greeks, not foreseeing what follows from such behavior. The Ant/s looks ahead and plans to provide for the leaner times ahead. Most of current economic theory today considers the Grasshopper to be as rational as the Ant :: choosing to act on one’s subjective preferences is always ‘rational’ in existing theory, irrespective of later outcomes.

        You: 2. That still does not explain the difference between ’instrumental value of goods’ and ’instrumental value of money’.

        Me: The instrumental value of money is primarily its use as the primary means of acquiring goods for ‘own’ or ‘personal’ use by economic agents. Because the purchasing power of a unit of currency in terms of itself is simply unity [1], the purchasing power of a unit of currency for good X simply $1/$px where $px is the price of a defined unit of X in terms of a unit of money. As I am writing this, the U.S. dollar spot price per ounce of gold is $1,186.74. Thus, a U.S. dollar will purchase 0.000842644555673526 ounces of gold as I write today.

        The purchasing power of any unit of currency is simply the amount of any other good that a single unit of that currency will “buy” at the market price of that good.

        [Aside: Though goods can be exchanged for money, the price of X today is not a good indicator of the value of of X in terms of money tomorrow. Though money is usually liquid with respect to itself (and with respect to other goods), goods are seldom as liquid with respect to money. Money, in other words, comes with a built-in guarantee that it can be exchanged for an equal amount of money tomorrow. Money is a store of value with respect to itself. That is not necessarily the case with goods.}

        Though the purchasing power of a unit of money relative to a unit of any commodity is fixed, this should never be confused with where monies are likely to be spent out of incomes. Both income and prices affect what is purchased, by whom, and to what ends.

        The range of ends being pursued through goods acquisition and use is, in part, a rising function of income.

        Those with low nominal incomes will generally have a markedly smaller range of ends being served by their purchases and usages of goods relative to the range of ends being served by the acquisition and uses of goods by higher nominal income groups.

        In part, that is because the nominal prices of goods enter into budget formation decisions, whether those of consumers as persons or as firms.

        Though nominal prices between ‘rivalrous’ goods partly determine the pattern of consumption amongst and between these goods as means of realizing particular ends, both technology and non-monetary costs {e.g., in time, energy, and preparation effort] are also factors in decision-making. I say partlyThat is because, in a monetary economy, the range of ends that can be served by acquiring and using goods with money rises with nominal income. Those in, say, the lowest income decile must allocate their budgets in manners designed to make a very limited set of distinct ends be realized. Satisfying preferences comes a very distant second to realizing one’s basic needs at lower levels of income. It is one thing to say that people who can afford to budget to satisfy their preferences will, by and large, do so; another entirely to imply that people will spend their incomes on goods that maximize their satisfaction.

        3. You: Regarding ‘choosing what we do not prefer’… That logically impossible.

        Me: A preference for staying alive and healthy as an objective outcome of my consumption activity hardly implies that my pattern of consumption is either mostly or solely guided by my subjective preferences between goods. In short, my subjective preferences between particular goods are not the same nor to be conflated with my prudential preferences for objective outcomes dependent my bodily and other needs, conscious or not, reasoned or not.

        When differing mixes of goods can serve as means of realizing intentionally or unconsciously preferred objective outcomes [like staying alive and healthy], then the question becomes not what goods do I subjectively prefer but rather which goods can I afford as means to realize these objective outcomes. Both my nominal income and the nominal prices of goods are serious constraints upon what I can afford budget for, which means that my selections are constrained to the goods I can afford to budget for.

        If I prefer steak to hamburger, this does not imply that I can budget for steak or even for a mixed basket of steak and hamburger. I may have to budget only for hamburger, or for a mixed basket of beans and hamburger without steak. The pattern of what I can afford (and buy) (and what I can’t and don’t) neither mirrors nor reveals my subjective preferences between goods.

        If I prefer good A to good B as a matter of taste, I may nonetheless have to budget for good B in amounts I would prefer not to have to because of objective outcomes associated with different choices. I can budget for out of my income. If objective outcomes matter, then satisfying tastes is irrelevant if I cannot afford to budget for my tastes. The very rich can afford to budget for their tastes most of the time, so I would expect that their patterns of personal and family spending would mirror and reflect their tastes between goods far more than for any other income group.

        I apologize for the length of this reply.

    • January 12, 2017 at 12:27 am

      Thank you for giving a lot of thought to your reply. Before engaging critically with your argument I want to preface that I do agree with a lot of what you say, especially about substitution of goods. Our original point of contention was whether the Purchasing Power of Money is a meaningful concept. I will get back to this line of thought at the end of this comment.

      Over the years I found that 9/10 times the reason for theoretic disagreement is definitional discrepancy. Both sides use the same words but they mean slightly different things, and once these differences are realised the dispute is often resolved to the satisfaction of both sides. I think the strength of contemporary philosophy is that it focuses fine-tuning the language and discovering implications of our claims in order to maximise theoretic consistency. I have become interested in economics because it is a real world test for philosophical thinking, an added layer of verification and realisation of ideas in a challenging and nowadays existentially critical field. I see economics as a bridge between pure philosophy and pure application, since it embodies elements of both domains. Since the distribution of power in our society is largely determined by how economy is structured, clarity vs. obfuscation of economic concepts is not only of philosophical but also of political importance.

      “no economic agent is a life form”

      True, but lifeform (body) is not all there is to life. The body exists after consciousness has died, and we can hardly say that it continues to be motivated to act, objectively or subjectively, even if it continues to function in some sense until it wholly decomposes into different life forms.

      “With infants it has been shown that if, over a month, they are presented with an array of various foodstuffs with essential nurtients, then though not intentionally choosing a balanced diet on any days, they will nevertheless eat what provides them with essential nutrients.”

      If infants are also presented with refined sugar, by the time they are toddlers they will freely ’choose’ nothing else, because sugar addiction is physiological (latest research shows/claims 8x that of cocain), and by the time they are 30 are likely to have countless health problems caused by that addiction.

      “choosing to act on one’s subjective preferences is always ‘rational’ in existing theory, irrespective of later outcomes”

      In philosophynof action this is not the case. Acting on ’a reason’ is not necessarily acting on ’a good reason’, especially if ’goodness’ or ’value’ of a reason is considered as objectively normative, or even subjectively normative towards achieving a particular outcome. Having ’preferences’ does imply having ’rational preferences’ in light of our more fundamental value commitments or our system of explicit beliefs.

      “life forms have critical needs and wants which have to be realized for our bio-psycho-social health and continuity.”

      I understand your argument as geared toward the claim that our subjective preferences are not paramount, but our objective (subconscious/unconscious) ’preferences’ are a kind of ’drive’ that forces us to act in particular way even if we don’t want to. This drive, you submit, may be survival and health. What counts against your claim, if I am interpreting it correctly, is that we very often act against our health and even survival, we have countless subjective preferences that we know will hurt our health, or even kill us in the end, and we act on them nonetheless. I may be smoking 40 cigarettes per day, deeming it preferable to enjoy this habit even if my health will suffer and I will reduce my life span by 20years. I may prefer to live a short life “to the fullest” over living a long a healthy life full of boredom and lukewarm satisfaction. And if our subjective preferences can override the objective preferences then it begs the question in what sense they can be ragrded as objective. It seems that out ’objective’ drives must ultimately find expression in our subjective preferences, and even if we can’t realists our ideal imagined preference because of material constraints we still prefer something ’under the martial circumstances’. In context of the example you present about choosing a tasty steak I cannot afford and a poor tasting burger I can afford, I still prefer to eat the burger than not eat anything at all. Nothing materially forces me to eat if I were determined not to eat burgers. After all, people voluntarily go on hunger strikes, demonstrating that subjective preferences can override physiological urges.

      I think your argument in regard to ’objective preferences’ fails, but that is not necessarily fatal to your economic argument, nor is it needed. I agree with your claims about substitution, but that does not show that the concept of Purchasing Power of Money is meaningless, just like consumer price inflation based on a basket of goods is meaningless, and purchasing power is in effect an inverse of inflation. Yes, these are quite abstract, macroeconomic quantities, and their usefulness may be very limited, but that does not make them meaningless or absolutely useless in understanding economic performance and distribution of value in a closed economy.

      One more point regarding the “instrumental value of money”.

      “Money is a store of value with respect to itself. That is not necessarily the case with goods.”

      What value? Money is the story of the value of money? Isn’t this a circular reference? That’s like pulling yourself out of a swamp by your own hair:) If the value of money is how much of particular goods it can buy, if it can buy nothing then it has no value at all. Or do you mean ’instrumental value of money’ is just the ’intrinsic value of money’? But then we are talking about intrinsic value which is a well established concept.

      In any case, if $100 as long as it continues to exist is $100 (that’s what it’s identity necessitates) then a brick, as long as it continues to exist, is a brick. Which doesn’t tell us much. I prefer to talk about real-value (the very things we consider as valuable, irrespective of their utility) and representative-value (the measure of real-value by means of some monetary dimension). And the moment we talk about representation of real-value several abstract macroeconomic concepts become very important and useful in understanding that relation. One is to formalise how the representative-value of the units of account (which is always a claim on real-value) is determined, who contributes to it, and who benefits from it. I am not sure if the terms of reference we use in regard to these issues are equivalent, but I think they at least reconcilable.

  3. Grayce
    January 8, 2017 at 10:18 pm

    There is a reason to avoid using “wage-price spiral” as if it is a natural dynamic. The term has always been deficient of its third partner, “Profit.” If wages were stagnant, and shareholders demanded “higher shareholder value” and got it, then you could envision a “profit-price” spiral. It would probably not be reported as such, and counter measures by accounting might use workforce cuts to make the discrepancy disappear as “productivity.”
    But, productivity is false if it uses the last year’s output divided by a current (downsized) labor input.
    A second source of error in the wage-price spiral paradigm occurs when the wage is actually rising compensation to corporate officers and not a wage increase to the production workers. The combination of executive compensation and shareholder buybacks or dividends may look like a cost of production, and it may be accounted for by non-GAAP factors, but it remains for the open-eyed economist to know the difference. Think of a wage/comp/profit-price spiral if you must.

  4. patrick newman
    January 9, 2017 at 1:01 pm

    Talking about living standards especially of the bottom two income deciles neither the CPI nor the RPI provides an accurate picture of the inflation these two groups experience which generally is higher than average. They are vulnerable to higher price increases from utilities, transport, local government, prescription charges etc. Furthermore there is implied
    reduction in living standards through cuts to public services which generally the poor are more dependent on – e.g. closure of day centres, Sure Start services to mothers, bus services. There is a case for a composite index of low income inflation and service equivalence to enable assessment of the effects on the standard of living of these groups of government policies.

    • merijntknibbe
      January 9, 2017 at 1:04 pm

      That’s the whole point. They are using the same kind of money – but it’s purchasing power evolves differently that that of other consumer groups because their pattern of spending differs. this is one of the reasons why we should not talk about the purchasing power of money but about the purchasing power of income. More precisely: the purchasing power of income of different social groups.

      • January 10, 2017 at 4:30 pm

        Precisely!

  5. January 10, 2017 at 6:25 pm

    Let’s call this Part II of my response to your questions, Mr. Kowalik. Before going ahead with it, let me simply state that I entirely agree with merijntknibbe’s statement to Patrick Newman that “[T]his is one of the reasons why we should not talk about the purchasing power of money but about the purchasing power of income. More precisely: the purchasing power of income of different social groups.”

    The instrumental values of goods are what they contribute as distinct means of obtaining specific ends.

    Marshall used the term ‘rivalrous goods’ to distinguish between goods that could be broad substitutes for each other in some purposes. Think here of food substitutes in terms of digestion/diet, or input substitutes in terms of production.

    That is why a thirsty person in the middle of a desert will choose a cup of water over a cup of gold to assuage his or her thirst. Gold, whatever its exchange-value, has no instrumental value in assuaging thirst. It is not a rivalrous commodity as it is not a quaffable liquid that assuages thirst/sustains life. Gold has various instrumental values lie elsewhere, but not as a thirst quencher.

    One uses goods in different ways for different purposes, with the instrumental value of a good for a specific purpose being what it contributes as a means of realizing this end.

    It is the various ends themselves which determine if a good has any instrumental value as a means of pursuing such ends. Limited incomes are limited means of making ends meet.

    [An Aside:

    Which is partly to say that price-substitution is, in itself, not a sufficient reason for economic substitution between goods. Which is also why one must reject the Hicksian innovation in Value and Capital as well as Samuelson’s Revealed Preference Theory, since both imply that the instrumental uses that all consumption serves can be ignored by assuming that consumers are always subjectively satisfied with what they get to purchase even if what they get does not suffice to make ends meet.

    In a monetary economy, money is the primary instrument :: the primary and often only means :: of acquiring the ‘own’ use of a marketed commodity for any purposes. If an economic agent has no money (or credit), that agent cannot acquire marketed goods for ‘own’ or ‘personal’ use. [I will not go into the distinction of ‘own’ versus personal use here.] I agree with William Stanley jevons that “All is Consumption”, though I have discarded his and Marshall’s views of utility as a benefit OR a satisfaction, as if these are not distinctly different outcomes.]

    Mr. Kowalik, I am not prepared to throw out thousands of years of human thought about values-in-use versus values-in-exchange as meaningless THOUGHTS ABOUT merely because economists later discovered that goods values-in-exchange (as opposed to their goods use-values) are very much influenced by scarcity, actual or institutionally imposed. Indeed, in my view, the idea that satisfaction is correlative with having benefits is a very poor substitute for acknowledging the reality that exchange-values are, due to the influence of scarcity (real or imposed), only very exceptionally likely to bear any relationship to the instrumental values of goods in particular uses. Indeed, it is time to re-introduce values-in-use if we are to ever construct a useful theory of consumer activity.

    If the primary use of money is as a means of acquiring goods for any use –here regarding any goods use in production as merely another form of goods consumption– then income levels determine what can be consumed to effect what goals and whether preferences can be positively ‘satisfied’ in any way. A preference theory which ignores the reality of being able to be dissatisfied with consumption constrained both by income and prices is not a theory of likes and dislikes, but merely an ideology.

    If I have somehow not answered your questions, please let me know.

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